FEDERAL CONTRACT LAW

Federal credit card invoices don't list all costs

Joseph J. Petrillo

Very quietly, a revolution is taking place in government contracting. The lowly credit card is cornering the market for small purchases, racking up big dollars in the process.

An exquisitely researched thesis by Neil Whiteman, a master's candidate at George Washington University Law School, traces the history and implications of this revolution. His work was published recently in the Public Contract Law Journal.

The basic idea is simple and familiar. A government employee with a credit card can pay for goods or services up to $2,500 per purchase.

Some 700,000 government employees have credit cards. Although the average purchase is a little more than $500, there were 23 million of them in fiscal 2000. The average yearly expenditure per cardholder is about $18,000. Credit card transactions account for two-thirds of all government contracts.

These little buys add up'more than $12 billion in fiscal 2000. And their growth has been explosive. In fiscal 1994, purchases with government credit cards amounted to less than $1 billion.

Whiteman attributes the expansion of credit card sales to two factors. The first is former Vice President Al Gore's government reinvention program, which promoted the use of credit cards as an efficient alternative to previous buying methods. The second was the Federal Acquisition Streamlining Act of 1994, which established a micropurchase limit of $2,500 that exempted the requirement to favor small businesses and domestic suppliers and avoid the requirement for competition.

The credit card is also responsible for a major cultural change in procurement. For the first time, government employees without a contracting officer's warrant are spending government money for items and services besides business travel.

Indisputably, the credit card is more efficient than the old, cumbersome procedures for making small purchases. This has led some in the government to estimate enormous savings for this program. The General Services Administration claims more than $1 billion. But such estimates are almost certainly overstated; they ignore the hidden costs of the program.

One of those costs is the price premium charged by vendors to accept credit card transactions. Those vendors must pay fees to the financial institutions that disburse payment and pay rebates to government agencies. Presumably, vendors' prices include these fees.

Another hidden cost is for the time spent by cardholders to make the purchases. A motor pool mechanic shopping at the local auto parts superstore isn't fixing vehicles. A network administrator surfing the Internet for hardware and software deals isn't providing technical support. Because no one accounts for this time, the price of it never figures into the program's supposed benefits.

Being exempt from small business and other preferences, the credit card program also hinders government efforts to promote socioeconomic goals through contracting.

In addition, the lack of scrutiny for credit card purchases results in de facto exemptions from other requirements, such as the policy to buy recycled materials. Also getting short shrift are the preferences for government wholesale activities, Federal Prison Industries Inc. and qualified contractors employing the disabled. And there is no way to tell whether micropurchases are distributed evenly among qualified suppliers, as the law requires.

Another victim of credit card purchases is transparency in government contracting. As Whiteman points out, credit card purchases aren't tabulated in the Federal Procurement Data System, although banks already report much of the needed data in electronic format. Making matters worse, many agencies routinely destroy records of credit card purchases after one year.

Whiteman has done us a great service with his thoughtful article. I hope he gets his master's degree.

Joseph J. Petrillo is an attorney with the Washington law firm of Petrillo & Powell. E-mail him at jp@petrillopowell.com.

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